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June 7, 2012

5 Misconceptions About Consumers and IRA Rollovers

Many retirement plan record keepers have failed to capture their fair share of the IRA rollover market—and this oversight creates a massive opportunity for advisors, according to recent research from McKinsey & Co.

McKinsey partner Céline Dufétel laid out the essentials of capturing IRA rollover assets at a breakout session at Pershing Insite 2012 on Thursday in Hollywood, Fla. Noting that IRAs are expected to generate as much as $500 billion in each of the next few years, Dufétel said these flows will represent 40% to 50% of net new money for retail brokerages and registered investment advisors between now and 2015.

“Most people leave behind a long trail of 401(k) or IRA accounts,” Dufétel said of McKinsey’s findings, which involved many interviews in people’s homes to talk about their feelings about retirement. “It’s funny how many people tell you, ‘I just gave up trying to roll over my account because it was too complicated.”

Rollovers are a good trigger point for advisors to establish a wider relationship with clients, noted Pershing retirement practice leader Rob Cirrotti in an interview after Dufétel’s Insite session.

“If you look at the retirement marketplace, IRAs represent the largest percentage of asset management opportunities,” Cirrrotti said.

Contrary to common advisor belief, IRAs represent a significant share of client assets across all wealth segments, with 91% of households owning such accounts, ranging from $100,000 to $5 million in investable assets, according to the McKinsey research.

What are the most widespread misconceptions about client behavior when it comes to IRA rollovers? Advisors should take a closer look at these five misconceptions, according to Dufétel:

1) Misconception: Investment options and fees drive consumer decisions. Reality: Convenience and perception of simplicity is often the leading decision factor for consumers who prefer the path of least resistance.

2) Misconception: Consumers who have advisors automatically roll over assets with them. Reality: A surprisingly large number of advisors don’t address the issue with their clients, even though rollovers and IRA consolidation are critical client acquisition events.

3) Misconception: IRAs don’t bring in substantial assets from the affluent or high net worth. Reality: IRAs represent close to 20% of assets for households with $500,000 to $5 million in investable assets.

4) Misconception: IRA rollovers are rare and hard to predict, so the opportunity closes quickly. Reality: One out of five brokerage customers experience a rollover event each year, such as a job change or divorce, and advisors typically have a one- to three-month window before consumers move assets away from the plan after the trigger event.

5) Misconception: A sale is closed when the client agrees to roll over assets. Reality: Consumers easily disengage when the process takes too long or is too complex, and players can lose as much as 60% of applicants during the rollover process.